14/02/2019Is Your RDSP Protected if You File for Bankruptcy?
In 2009, the federal government made major amendments to the Bankruptcy and Insolvency Act (the “Act”). One of the key amendments to the Act was the protection of Registered Retirement Savings Plan’s (RRSPs) and Registered Retirement Income Funds (RRIFs) so long as the funds were not contributed in the 12 months prior to bankruptcy.
The RRSP exemption was granted for two reasons:
- Pensions are not seizable in bankruptcy and the government believed that RRSPs, which serve the same purpose as a pension, should not be treated differently.
- It is not in the wider public interest to allow RRSPs and RRIFs to be seized as a person who loses all of their retirement savings will ultimately rely on the public to fund retirement.
A few times a year, our firm has to consider whether a Registered Disability Savings Plan (“RDSP”) is exempt. RDSPs are not specifically mentioned as exempt in the Act and the general rule of thumb is that if an ‘asset’ is not specifically mentioned as exempt then it is seizable. The only other authority to exempt assets in specific cases is case law or the decision of an authoritative Court.
A Licensed Insolvency Trustee (“LIT”) does not get to choose whether an asset is exempt or not, they must follow the prevailing law. However, it appears to most LITs that there are greater reasons for RDSPs to be exempt – even more so than RRSPs.
RDSPs are meant to assist severely disabled people in saving for their retirement. As disabled people are less likely to have the means to save enough for retirement, the government provides a grant of up to 300% of the initial contribution. A seizure would result in the RDSP contributions going into the bankrupt estate while the grant would be returned to the government.
There is a rigorous test to determine whether a disabled person qualifies for the RDSP grant. Based on an analysis of the purpose and process in distributing the grants, a reasonable person would likely surmise that seizing RDSPs is not in the public interest and comes with a far greater cost than benefit.
Thankfully, in a Court decision called Alary (re) the Trustee’s ability to seize an RDSP was considered and in this writer’s opinion, a good decision was made. The Honourable Madam Justice Bruce acted in the public interest and did not permit the release of RDSP funds to the LIT. Consequently, unless there is an opposing decision, LITs can treat RDSPs as exempt.